1CM Inc. (CSE:EPIC) Might Not Be As Mispriced As It Looks After Plunging 30%

To the annoyance of some shareholders, 1CM Inc. (CSE:EPIC) shares are down a considerable 30% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 89% share price decline.

Since its price has dipped substantially, given about half the companies operating in Canada's Pharmaceuticals industry have price-to-sales ratios (or "P/S") above 1.2x, you may consider 1CM as an attractive investment with its 0.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for 1CM

What Does 1CM's Recent Performance Look Like?

1CM certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on 1CM's earnings, revenue and cash flow.

How Is 1CM's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as 1CM's is when the company's growth is on track to lag the industry.

Taking a look back first, we see that the company grew revenue by an impressive 118% last year. This great performance means it was also able to deliver immense revenue growth over the last three years. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 8.9% shows it's noticeably more attractive.

With this information, we find it odd that 1CM is trading at a P/S lower than the industry. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

The southerly movements of 1CM's shares means its P/S is now sitting at a pretty low level. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We're very surprised to see 1CM currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.

Plus, you should also learn about these 3 warning signs we've spotted with 1CM (including 2 which are concerning).

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.